The Celtic Disaster Writ Large
From Felix Salmon at Reuters:
The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt…
The impetus for this completely insane policy seems to have come from the ECB, which genuinely seems to believe that bailing in private-sector banks, in the Greece restructuring, was the “terrible mistake” which caused the current euro crisis. Talk about confusing cause and effect: it was Greece’s fiscal disaster which caused the restructuring and the necessary bail-in.
To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.
It thought the reason Greek bond holders got a 50% haircut was to achieve some short term debt relief and avoid a default which would have triggered disastrous CDS unwinds.
And right on time, Simon Black appears at Zero Hedge with the latest in the 300 year old Venetian invention of foisting private debt onto the public:
Faced with failed auctions, declining demand, and rising yields, politicians are having to resort to desperate measures.
Like any good scam artist, they’re appealing to the masses first; all over Europe, governments are sponsoring new marketing campaigns suggesting that it’s people’s patriotic duty to buy government debt…
Thing is, it’s not the millionaire sports stars, wealthy business leaders, or political elite who are buying these bonds… at least, not in anything beyond a token, symbolic amount. It’s the average guy on the street who really stands to get hurt when the government finally capitulates.
From Sebastian Tong at Reuters:
It was easy to cast doubt on the value of CDS in insuring creditors against outright default after the latest proposal to restructure Greek debt with a 50 percent haircut failed to trigger payouts on contracts referencing the country.
Add to this an impending European Union ban on “naked” sovereign CDS trades aimed at investors who don’t have ownership of the underlying government debt, and it is little surprise that economists wondered whether the market would survive.
But while parts of the trade appear to be withering, certain segments are thriving…
“Very few people buy CDS purely as insurance for default,” said Sergio Trigo Paz, chief investment officer emerging markets fixed income at BNP Paribas Investment.